The Second District's economy has shown more signs of stabilizing in recent weeks, though, on balance, economic activity may still be contracting. The labor market remains exceptionally weak but with some signs of leveling off. Manufacturing sector contacts report stable conditions and are generally optimistic about the near-term outlook. Retailers indicate that sales were steady in June and early July while continuing to run well below 2008 levels. Consumer confidence was mixed but generally steady at a low level in June. Tourism activity in New York City has also been sluggish but little changed since the last report, as have been commercial real estate markets. Housing markets have shown some signs of stabilizing in northern New Jersey and upstate New York but continued to deteriorate in New York City and especially in Manhattan. Finally, bankers report a downturn in loan demand--particularly from the household sector--as well as ongoing tightening in credit standards and steady to higher delinquency rates.

Consumer SpendingRetail sales were reported to be on or somewhat below plan in June but still down considerably from a year earlier, with selling prices holding fairly steady. Retail sales in New York City, which had been lagging the rest of the region, reportedly picked up in June and early July but remain 8-10 percent below comparable 2008 levels. Contacts in western New York State note that Canadian customer traffic has remained weak and that sales have been stable but below plan and still down from 5 percent to 15 percent from a year earlier. One major chain indicates that, in general, moderate price line merchandise has been selling better than either premium lines or lower-priced lines. Overall, inventories are said to be at favorable levels, and selling prices remain stable, though a number of contacts indicate that low inventory levels have enabled them to be a bit less promotional than in recent months. Auto dealers in upstate New York report that sales continue to run 20-30 percent lower than a year ago--less steeply than in other parts of the country--though the pace of decline has moderated since the last report. Tight credit continues to be a major issue, particularly for dealers who rely on floor plan loans to finance their inventories.

Consumer confidence was mixed in June but at low levels. The Conference Board reports that confidence among residents of the Middle Atlantic states (NY, NJ, Pa), rose modestly in June, reaching its highest level in over a year, though still quite low by historical standards. Siena College reports that consumer confidence among New York State residents retreated in June, after rising in April and May. Tourism activity in New York City has been weak but stable since the last report. Manhattan hotels report that revenues continued to run 35-40 percent below a year ago in June; occupancy rates remained in the mid-80s in June--down just 4-5 percentage points from a year earlier--but room rates were down roughly 30 percent. Broadway theaters report that attendance weakened further since the last report and was down more than 10 percent from a year earlier; however, a 15 percent jump in average ticket prices starting in late May has boosted total revenue moderately ahead of year-ago levels.

Construction and Real EstateCommercial real estate markets in the District were, on balance, steady since the last report. Manhattan's office vacancy rate was steady in June but rose modestly during the second quarter; asking rents on Class A properties continued to slip and remained more than 15 percent lower than a year earlier. There are reported to be more than 13 million square feet of space (2-1/2 percent of the overall market) currently under construction, partly related to the rebuilding of the World Trade Center. Around the District, office vacancy rates have also risen in Northern New Jersey, as well as in the Rochester metro area; however, vacancy rates are reported to be lower than a year ago in the Long Island, Buffalo, Syracuse and Albany areas, and steady in Westchester and southwestern Connecticut. The office-building sales market is reported to remain exceptionally weak throughout the District.

Retail real estate markets are mixed: in Manhattan, the rental vacancy rate fell below 3 percent at mid-year, though asking rents are down roughly 6 percent from a year ago; in northern New Jersey, however, vacancy rates have risen by a full percentage point over the past year, and rents are down marginally. Retail real estate markets in upstate New York have been steady, on balance. Industrial markets have been mixed: vacancy rates have climbed in northern New Jersey and metropolitan Rochester but have eased in the Buffalo and Westchester markets.

Housing markets remained soft throughout most of the District, though there were signs of stabilization in a number of areas. Contacts in northern New Jersey indicate that the market has a somewhat more positive tone than in recent months: prices, though still down about 15 percent over the year, appear to have stabilized somewhat and volume has picked up moderately. There is still reported to be a moderate degree of new development of multi-family buildings along the Hudson waterfront, but otherwise new construction activity is described as moribund. New construction in the Buffalo-Niagara Falls area was reported to be exceptionally slow in April and May but picked up in June; while the high end of the market has weakened somewhat, sales activity at the low end ($150,000 and under) has reportedly been fairly brisk, with multiple bids, sometimes above the asking price. This strength was largely attributed to the $8,000 tax credit for first-time homebuyers. Overall, home prices have held relatively steady in western New York State.

New York City's market, however, has shown further signs of deteriorating, in both the sales and rental markets. In the second quarter, the median sales price for existing co-ops and condos in Manhattan reportedly fell 26 percent from a year earlier, while the number of sales transactions fell 50 percent; the inventory (number of units listed) was up 9%, though there is reported to be a substantial "shadow" inventory of new apartments--condo units that are unsold but not yet listed. Brooklyn's and Queens' markets have also slackened in the second quarter, with median prices of existing apartments reported to be down 15 to 17 percent from a year earlier, and the number of transactions down roughly 30 percent. The city's rental market has also slackened further, with asking rents reported to be down 8-12 percent over the past year, and actual rents off more than 17 percent, on a per square foot basis. Also, landlords are increasingly offering concessions--free rent for one or more months--in slack neighborhoods.

Other Business ActivityA leading New York City employment agency notes that the labor market, though still exceptionally slack, has shown some signs of stabilizing since the last report--there continues to be very little hiring activity from the financial sector, but hiring has reportedly picked up somewhat in the legal industry. Still, there is reported to be a huge pool of candidates and few opportunities overall. More broadly, both manufacturers and firms in other sectors generally report that they are still reducing employment, on net. Manufacturing contacts in the District report that business activity has leveled off since the last report, but non-manufacturing contacts overall indicate that conditions have weakened. Still, a large proportion of both groups say they are optimistic about the business outlook. Firms across most sectors report moderate increases in prices paid but modest declines in prices received.

Financial DevelopmentsSmall to medium-sized banks report weakening loan demand across all categories, but most notably in the residential mortgage and consumer loan categories, where 56 percent of those surveyed report a decrease in demand. A pullback is also reported in refinancing activity. For all loan categories, respondents indicate continued tightening of credit standards, with no banker reporting an easing of standards. Bankers report an increase in the spreads of loan rates over costs of funds for all loan categories--most widely in the commercial mortgage loan category. There were also widespread increases noted in deposit rates. Finally, bankers indicate no change in delinquency rates for all loan categories except residential mortgages, where 26 percent of bankers report increases in delinquency rates and 15 percent report decreases.